Text version: Investing in mortgage schemes

Introduction

This is an independent guide for investors about
unlisted mortgage schemes.

This guide is for you, whether you're an
experienced investor or just starting out.

How can this booklet help you?

Read this guide together with the Product Disclosure Statement
(PDS) and any other disclosure documents for the investment. ASIC
does not endorse specific investments.

About ASIC

The Australian Securities and Investments Commission (ASIC) is
Australia's corporate, markets and financial services regulator.
One of our roles is to promote confident and informed participation
by investors and consumers in the financial system.

MoneySmart is our website for consumers and investors to help
you make smart choices about your personal finances. It offers
calculators and tips to give you fast answers to your money
questions.

Visit www.moneysmart.gov.au or call ASIC on 1300
300 630.

Key tips from ASIC about investing

Anything you put your money into should meet your goals and
suit you.

No one can guarantee the performance of any investment. You
might lose some or all of your money if something goes wrong.

The rate of return offered is not the only way to assess how
risky an investment is.

'High return means high risk' is a familiar rule of thumb.
However, some investments, even if they seem to offer relatively
modest returns, can be extremely risky.

Take your time and do your research before deciding what to
invest in. Visit ASIC's website for consumers and investors,
MoneySmart at www.moneysmart.gov.au, for more
information.

You are taking a big risk if you put all your money into one
investment. Spreading your money between different investment types
('diversification') reduces the risk of losing everything.

Consider seeking professional advice from a licensed financial
adviser.

Know what the
investment is

What is a mortgage managed investment scheme?

A mortgage managed investment scheme ('mortgage scheme') uses
your money to lend (as mortgage loans) to a range of borrowers who
use the money to buy and/or develop properties. It might also be
used for other investments (for example, investing in other
mortgage schemes).

A company (the 'responsible entity') is appointed to run the
mortgage scheme on behalf of investors. As an investor, you rely on
the responsible entity to manage the scheme.

In return for investing your money (your 'capital'), the scheme
promises to pay you a regular income, usually quarterly or
half-yearly (called 'distributions'). The fulfilment of this
promise is conditional on such factors as whether the scheme has
sufficient cash to meet distributions.

The mortgage scheme's income, and your investment returns,
depend on factors such as whether the scheme's borrowers repay
their loans and interest on time.

There are three types of mortgage schemes, as shown in the table
below.

The three types of mortgage
schemes

Mortgage scheme type

What is it?

Pooled mortgage scheme

All investors have a share in all the scheme's mortgages and
investments.

All investors share the income and risks.

Some schemes promote that you can withdraw your money at short
notice, but it might take a while
(e.g. 12 months) to get it back.

Contributory mortgage scheme

You or the responsible entity chooses which mortgage(s) you
invest in.

Your mortgage(s) might pay a different income from other
mortgages in the scheme.

Your risk depends on the quality of the borrower(s) that you or
the responsible entity lends to.

Usually, you can only withdraw your money when your mortgage
investment matures.

Feeder fund

You invest money in a scheme that in turn invests all or most
of the scheme's assets in other mortgage schemes. In some cases,
the responsible entity should provide you with information on the
mortgage schemes in which they invest.

What is an 'unlisted' mortgage scheme?

An unlisted mortgage scheme is not listed on a public market,
such as the Australian Securities Exchange (ASX).

There are differences between listed and unlisted mortgage
schemes that can make it harder for investors to easily know what's
going on with their investment. For example, with an unlisted
mortgage scheme:

you can't see the price of the investment (and whether it is
going up or down) and decide to buy or sell when you want to,
and

the scheme is not subject to ongoing supervision by a market
supervisor.

ASIC has developed eight benchmarks and eight disclosure
principles for unlisted mortgage schemes to help you assess the key
risks (see pages 14-37).

What's the difference between a mortgage scheme and other
investments?

A mortgage scheme is not the same as a property trust, term
deposit or debenture.

How the different investments
work

Investment type

How it works

Mortgage scheme

You invest money in a mortgage scheme. You might not be able to
withdraw from the scheme at short notice. You are not guaranteed a
fixed rate of interest or the return of your capital. The scheme
invests in residential property and commercial property
mortgages.

Property trust

You invest money in a property trust. You only get your money
back when the property trust ends or if you have a right to
withdraw. You are not guaranteed a return on your investment or the
return of your capital. The property trust invests directly in
property, rather than in mortgages over property.

Term deposit

You deposit your money with a specially regulated financial
institution such as a bank, building society or credit union for a
fixed term in return for a fixed rate of interest.

Debenture

You lend your money to a business, usually for a fixed term. You
are not guaranteed a fixed rate of interest or the return of your
capital. The business might invest in mortgages and/or
properties.

Do your
research

Before you invest, find out as much as you can about the
features and risks of the investment. The responsible entity must
give you a Product Disclosure Statement (PDS).

Why is the PDS important?

The PDS tells you how the mortgage scheme works and you should
read it in full. Under the law, the PDS must include enough detail
for you to compare similar financial products so you can make an
informed decision.

Concentrate on the sections in the PDS that:

explain the key features and risks of the investment

tell you about the fees you will pay, and

give you information about certain indicators (or 'benchmarks')
and disclosure principle information, which can help you assess the
risks (see pages 14-37).

This information should be in the first few pages of the PDS.
The responsible entity must also tell you when there are
significant changes to the information in the PDS (this is called
'ongoing disclosure'). If you decide to invest in a mortgage
scheme, check the scheme's website and look for regular
updates.

What are 'investment ratings'?

An 'investment rating' is an opinion by a research house or
research company about the likely performance of an investment, or
its relative performance compared to other similar investments.
This is different from a 'credit rating', which is an opinion about
a company's ability to pay all its debts on time and in full.

An investment rating is only one factor to consider when
deciding whether or not to invest in a mortgage scheme. And not all
investment ratings are the same:

Some research houses rate investments with stars (the more
stars the stronger the recommendation) and some use words like
'recommended'.

The way the ratings are calculated varies. Some research houses
only assess investments using publicly available information about
the investment (such as price and returns), while others do more
in-depth research (for example, speaking directly to the investment
managers).

Many research houses receive payments from the responsible
entity promoting the investment being rated.

TIP:

If you don't understand how the rating was calculated or how to
use it, contact the relevant research house or discuss it with your
financial adviser.

Only use ratings from companies that hold an Australian
financial services (AFS) licence.

Do you need advice?

Take your time and think things over before you invest. Make
sure you do your own research to ensure that you know the risks
involved, what exactly happens to your money and whether the
investment is really right for you. Get professional advice from a
licensed financial adviser if you're not sure what to do.

ASIC's booklet Getting
advice can help you understand personal financial advice and
what questions to ask your adviser. If you are thinking about
investing in a mortgage scheme, or if your financial adviser has
recommended such a scheme, make sure you find out the answers to
the questions opposite.

Questions you should ask

How does this investment fit into your financial plan and how
will it help you achieve what you want?

What are the risks of this type of investment and do you
understand them?

What will the mortgage scheme be doing with your money?

Could you explain to a friend or colleague the business model
of the mortgage scheme?

Do the anticipated returns justify taking the risks?

TIP:

The PDS and ongoing disclosure should tell you about the
mortgage scheme, what will be done with your money, and the terms
of the investment.

A PDS does not have to be lodged with ASIC before it can be used
to raise money from investors. ASIC does not check or endorse the
underlying investment in a PDS in any way.

Assess the
risks

The return offered on an investment is not the only way to
assess how risky it is. ASIC has developed eight benchmarks and
eight disclosure principles for unlisted mortgage schemes to help
you assess the key risks.

The responsible entity should tell you if the mortgage scheme
meets each benchmark and provide you with the information set out
in the disclosure principles. If a benchmark is not met, the entity
should explain why not, so you can decide whether you're
comfortable with the explanation.

The responsible entity should also tell you of any significant
changes to their performance against the benchmarks and update the
information in the disclosure principles (through ongoing
disclosure).

Here's how you can use ASIC's benchmarks and disclosure
principles to assess the risks in unlisted mortgage schemes:

Look for information relating to each benchmark and disclosure
principle in the mortgage scheme's PDS and ongoing disclosure
documents.

Find out if the mortgage scheme meets each benchmark and
provides the additional information set out in the disclosure
principles.

If a benchmark is not met, does the responsible entity explain
why not and how the risk is dealt with in another way?

Are you satisfied with how the responsible entity deals with
this risk?

If not, are you willing to risk your money in this
investment?

Remember

The benchmarks and disclosure principles are not a guarantee
that an unlisted mortgage scheme will perform well.

Even if the responsible entity meets all the benchmarks and
provides all the information in the disclosure principles, you
could still lose some or all of your money if things go wrong.

The benchmarks and disclosure principles are simply designed to
help you identify and understand the risks, and decide whether
or not to invest your money.

ASIC's 8 benchmarks and 8 disclosure
principles for mortgage schemes*

The PDS should tell you whether or not the mortgage scheme meets
each benchmark. If the benchmark is not met, the responsible entity
should explain why not and how the risk is dealt with in another
way.

Disclosure principles

* The benchmarks and disclosure principles
apply to unlisted mortgage schemes from 1 January 2013. A PDS
issued before that date may include different benchmarks and
disclosure.
^ This benchmark or disclosure principle applies only to pooled
mortgage schemes.

Benchmark 1:
Liquidity

Does the mortgage scheme have enough cash and liquid
assets to meet its financial obligations to you and all other
parties?

The responsible entity should tell you whether the benchmark is
met. The benchmark is met if the responsible entity for the
mortgage scheme:

estimates the scheme's cash needs for the next 12 months ('cash
flow estimates')

can show that the scheme has enough cash or other liquid assets
to meet those cash needs ('liquid assets' can be readily converted
into cash)

updates the cash flow estimates at least every three months and
ensures that they reflect any material changes, and

gets directors to approve the cash flow estimates at least
every three months.

What's at stake for you?

If the mortgage scheme doesn't have enough cash or liquid
assets, there might not be enough money to pay you regular
distributions or return your money when you expect it.

As a result of the global financial crisis, many unlisted
mortgage schemes had insufficient liquid assets to repay investors
at the end of their investment terms, or to allow early
withdrawals. In some cases, investors waited several years for
their money to be released from 'frozen' schemes.

Before investing in a mortgage scheme, understand the scheme's
liquidity and whether this benchmark is met. This will give you a
better picture of whether the scheme will be able to pay you
regular distributions, and to return your money when you expect
it.

Benchmark 2: Scheme
borrowing

Does the mortgage scheme have any current borrowings or
any intention to borrow?

The responsible entity should tell you whether the benchmark is
met. The benchmark is met if the mortgage scheme has no current
borrowings or any intention to borrow.

If there are borrowings, the responsible entity should tell you
about these borrowings under Disclosure Principle 2 (below).

What's at stake for you?

A mortgage scheme that relies on borrowings is unlikely to be
sustainable in the long term.

For example, if a mortgage scheme has debts due to be repaid in
a relatively short timeframe, this can be a significant risk,
especially during times when credit is more difficult and costly to
get.

Benchmark 3: Loan
portfolio and diversification

Does the mortgage scheme manage risk by spreading the
money it lends and invests between different loans, borrowers and
investments?

Just as you can spread your own investments to manage risk, a
mortgage scheme can manage risk by spreading the money it lends and
invests between different loans, borrowers and investments. This is
called 'portfolio diversification'.

This benchmark applies only to pooled mortgage schemes, although
diversification is important for all investments.

The responsible entity should tell you whether the benchmark is
met. The benchmark is met if the mortgage scheme's portfolio has
the following features:

assets have different sizes, borrowers, classes of borrower
activity and geographic regions

no single asset is worth over 5% of the scheme's assets

no single borrower is loaned more than 5% of the scheme's
assets, and

loans are secured by first mortgages over real property (for
example, land and buildings) - a lender of a first mortgage has
priority over other lenders in the event of a default.

What's at stake for you?

If the mortgage scheme's portfolio is heavily concentrated in a
small number of loans, or loans to a small number of borrowers,
there is a higher risk that a single negative event affecting one
loan will put the overall portfolio (and your money) at risk.

An example using personal finance:

If you put all your eggs in one basket (or all your money in one
investment) and something goes wrong, you risk losing everything.
Similarly, the risks are higher in mortgage schemes that are not
well diversified between different loans and investments.

Benchmark 4: Related
party transactions

Do any of the mortgage scheme's transactions involve
parties that have a close relationship with the responsible
entity?

A 'related party transaction' is a transaction (for example, a
loan) involving parties that have a close relationship with the
responsible entity.

Before entering into these transactions, the responsible entity
must get your approval unless there is an exception under the law
(for example, the benefit given to the related party is on 'arm's
length' terms). If your approval is required, the responsible
entity must set up a meeting where you can vote for or against the
proposed transaction. Before the meeting, the responsible entity
must give you enough information relating to the proposed
transaction so you can judge for yourself how to vote.

The responsible entity should tell you whether the benchmark is
met. The benchmark is met if the mortgage scheme does not lend to
related parties or to the scheme's investment manager.

If the responsible entity does not meet this benchmark, they
should tell you the details, and risks, of these related party
transactions under Disclosure Principle 4 (below).

What's at stake for you?

The risk with related party transactions is that they might not
be made with the same rigour and independence as transactions made
on an arm's length commercial basis. There could be a greater risk
of the loans defaulting (putting your money at greater risk)
if:

the mortgage scheme has a high number of loans to, or
investments with, related parties, and

the processes for assessing, approving and monitoring these
loans and investments are not rigorous.

An example using personal finance

If you lend money to family members or friends, your loan terms
and conditions might be very different from a bank's. You might not
expect to get your money back on time or in full. And you are less
likely to sue your family or friends for repayment.

Benchmark 5: Valuation
policy

How are the mortgage scheme's underlying assets
valued?

Knowing exactly how much a mortgage scheme's underlying assets
are worth (that is, accurate valuations of the mortgage security)
can help you assess the scheme's financial position. But to assess
how accurate these valuations are likely to be, you need to know
how they're done.

The responsible entity should tell you whether the benchmark is
met. The benchmark is met if the mortgage scheme's assets are
valued in the following way:

the responsible entity uses independent valuers that are
members of an appropriate professional body where the security
property is located

there are procedures to deal with any conflict of interest

different valuers are used (for example, rotating the work
between a panel of valuers)

an independent valuation of properties used for loan security
is obtained before making or renewing a loan and within two months
of directors forming a view of a likelihood that a security
property value decrease may have caused a material breach of a loan
covenant, and

if the property used for loan security is a 'property
development', the independent valuation is both on an 'as is' basis
and an 'as if complete' basis, and for all other property (for
example, established buildings) on an 'as is' basis.

What's at stake for you?

Without information about how valuations are done, it is more
difficult to assess a mortgage scheme's loan portfolio risks.
Keeping valuations up-to-date and ensuring that different valuers
are used means valuations are more likely to be accurate and
independent.

An example using personal finance

If you've ever sold a house, you know that putting a value on it
beforehand is not an exact science - you can only estimate what you
think your house might be worth at a point in time. Estimates also
vary depending on who is doing the valuation. Valuations are even
more difficult and unreliable when they're done before the house is
built. Similarly, the way that a scheme's assets and loans are
valued is important in determining the scheme's financial position,
and the likelihood of income and capital returns for investors.

Benchmark 6: Lending
principles - Loan-to-valuation ratios

How does the value of loans made by the mortgage scheme
compare with the value of assets used for loan security? Is this
proportion too high?

The loan-to-valuation ratio tells you the size of a loan as a
proportion of the value of the security property for the loan. This
ratio is a key risk factor when assessing whether to lend money to
someone. A high loan-to-valuation ratio may mean high investment
risks for you.

The mortgage scheme may lend for 'property development'. The
loan-to-cost ratio tells you how much of the total cost of the
development is being lent by the scheme to the developer. This
ratio helps you assess a developer's incentive to complete the
project. A lower ratio means the developer has invested more of
their own money in the project, while a higher ratio means the
developer has invested less.

The responsible entity should tell you whether the benchmark is
met. The benchmark is met if the responsible entity for the
mortgage scheme:

only lends money for the property development in stages, based
on independent evidence of the progress made, and

does not exceed the following loan-to-valuation ratios:

Business activity

Maximum loan-to-valuation ratio

Property development

70% of the latest 'as if complete' valuation

All other types

80% of the latest market valuation

For contributory mortgage schemes, the responsible entity only
needs to maintain these loan-to-valuation ratios for the specific
loans that relate to your investment.

What's at stake for you?

A high loan-to-valuation ratio means that a mortgage scheme is
more vulnerable to changing market conditions, such as a downturn
in the property market. Therefore, the risk of losing your money
could be higher.

It is important to understand how much of your investment is in
loans for property development. The risks involved with development
loans are very different from the risks of loans for existing
properties that produce an income. For example, there is the risk
that the development project will not be completed and the
developer may not be able to repay the loan.

An example using personal finance

You might take out a loan for $450,000 to buy a house valued at
$500,000 (a loan-to-valuation ratio of 90%). If there's a downturn
in the property market when you sell the house and you only get
$440,000, you won't have enough cash from the sale to repay the
loan. Similarly, when mortgage schemes make loans with high
loan-to-valuation ratios, the risks may be increased.

Benchmark 7:
Distribution practices

Are current distributions from the mortgage scheme paid
from borrowings?

'Distributions' are payments you receive from the mortgage
scheme during the year. These payments could come from:

income received (for example, interest from borrowers)

borrowings by the scheme, and

money the scheme receives from selling assets.

The responsible entity should tell you whether the benchmark is
met. The benchmark is met if the responsible entity does not pay
current distributions from borrowings.

If this benchmark is not met, the responsible entity should tell
you the risks associated with paying distributions from borrowings
under Disclosure Principle 7 (below).

What's at stake for you?

Some mortgage schemes promise to pay you a regular distribution
regardless of whether it actually receives its expected income.
Other schemes only pay you regular distributions if they earn
enough interest from borrowers and other investments during a
particular period.

If a mortgage scheme pays distributions from sources other an
income received from its existing loans and investments, this could
be unsustainable. This may be particularly important if you are
depending on distributions from the scheme for your regular income
or for living expenses.

Benchmark 8:
Withdrawal arrangements

Can you withdraw from the mortgage scheme and how long
will it take to get your money back?

Most contributory mortgage schemes only let you withdraw when
the particular mortgage you have invested in matures. On the other
hand, most pooled mortgage schemes say that you can withdraw from
the scheme at short notice. But in both cases, it might take a
while (for example, as long as 12 months) to get your money
back.

Mortgage scheme assets are often less readily 'saleable' or
'liquid' than other investments. This could limit when and how you
can withdraw from the scheme. Also, each scheme has its own rules
(in its constitution) about whether you can withdraw and how long
it may take.

'Liquid' and 'non-liquid' schemes

A mortgage scheme offering withdrawal rights may not necessarily
have cash readily available to return your money at short
notice.

Under the law, a scheme can offer you withdrawal rights if it is
a 'liquid scheme' that has at least 80% 'liquid assets'. These
assets may include money in an account or in a bank deposit. But
liquid assets can also include other property (such as real
property, mortgages and investments) if the responsible entity
reasonably expects that they can sell them at market value within
the timeframe for paying withdrawal requests set out in the
scheme's constitution. For example, if the constitution states that
your withdrawal requests must be paid within two years, any
property that the responsible entity reasonably expects can be sold
for its market value within those two years is treated as a 'liquid
asset'.

Mortgage schemes that are 'non-liquid schemes' under the law are
those that only allow you to withdraw from the scheme if the
responsible entity makes an offer to you.

The responsible entity should tell you whether the benchmark* is
met. For a 'liquid scheme', the benchmark is met if the responsible
entity:

will pay your withdrawal requests within 90 days and this is
stated in the scheme's constitution, and

only allows you to withdraw from the scheme where at least 80%
of the assets are 'liquid assets' of the following type:

Type of asset

How quickly can this asset be converted into cash?

Money held in a bank account or bank deposit

The responsible entity must be able to access this money
immediately or within 90 days of the end of a fixed term.

All other types (for example, mortgages and investments in
other mortgage schemes)

The responsible entity must reasonably expect that the asset
can be sold for its market value within 10 business days.

For a 'non-liquid scheme', the benchmark is met if the
responsible entity intends to make withdrawal offers at least
quarterly.

* Each mortgage scheme might have a different
set of rules for withdrawals, so only parts of this benchmark might
apply.

What's at stake for you?

Even if a mortgage scheme says that you can take your money out
at short notice, you might have to wait for as long as 12 months to
get it back. If too many investors want to get their money out at
the same time, the scheme may put a cap on the number of units you
can cash out, or it may even freeze all withdrawals. A responsible
entity can indefinitely freeze withdrawals if they consider this is
in the best interests of members. Before you invest, make sure you
can wait for the maximum withdrawal period to get your money
back.

If a mortgage scheme's policy is to reinvest your money and you
don't withdraw it before it's rolled over, your money might be tied
up for longer than you planned.

A 'fixed unit price' might not remain fixed under certain
circumstances. This could mean you won't get back the money you
expect when you withdraw from a mortgage scheme if the value of the
assets falls.

Hardship cases

If withdrawals from your mortgage scheme are frozen, you may be
able to access your funds, up to a cap, if you are in hardship
(assuming the scheme has enough cash to pay such requests). This
would generally only be if:

you're unable to meet reasonable and immediate family living
expenses

there are compassionate grounds (for example, medical costs for
serious illness, funeral expenses, or to prevent foreclosure),
or

you suffer permanent incapacity.

Disclosure Principle
1: Liquidity

Does the mortgage scheme have any significant risks to
liquidity and what is the scheme's policy on managing
liquidity?

The responsible entity of the mortgage scheme should tell
you:

the scheme's current and future prospects of liquidity and any
significant risks that may affect this liquidity, and

the scheme's policy on managing liquidity (balancing its assets
against its debts or 'liabilities'). For example, does the scheme
have a policy of ensuring that it holds enough assets that can
easily be converted into cash, so future requests for redemptions
can be met?

This disclosure principle applies only to pooled mortgage
schemes.

Disclosure Principle
2: Scheme borrowing

If there are borrowings, how much has the mortgage
scheme borrowed and, for debts due within two years, can the scheme
repay/refinance them?

The responsible entity of the mortgage scheme should tell
you:

why they have borrowed the money (including whether the money
will be used to pay distributions or withdrawals)

if they have broken any significant promises made in loan
agreements (called 'loan covenant breaches')

that amounts owing to lenders or other creditors of the scheme
rank before your investment

details of their interest rate and foreign exchange hedging
policies and if the scheme's interest rate and/or foreign exchange
exposure complies with these policies

the risks associated with the scheme's borrowings and maturity
profile of the credit facility, and

the following details about their debts:

Debts due in:

What the responsible entity should tell you

Less than 2 years

total debts due and their maturity profile

the undrawn credit facility (that is, how much can still be
borrowed), and

whether refinancing or sale of assets is likely during this
period

Between 2 and 5 years

total debts due and their maturity profile for each 12-month
period, and

the undrawn credit facility (that is, how much can still be
borrowed)

More than 5 years

total debts due

You can get a good idea of a mortgage scheme's financial status
by knowing:

how much money the scheme owes and when these debts are due to
be repaid (its 'maturity profile'), and

how much money the scheme can borrow compared to how much the
scheme has already borrowed (its 'undrawn credit facility').

Examples using personal finance

Example 1: Maturity profile

You might have a debt that is due to be repaid in two years. If
you pay off the original loan amount ('principal') together with
the interest, your debt reduces to $0 over the two years.

If you choose an 'interest-only' loan, you only pay the interest
part before the debt is due. You would then have to repay all of
the principal investment at the end of the two years.

If you didn't have enough money to pay off the principal
investment at that time, refinancing your loan to extend the due
date would be very important; otherwise, you may default on your
debts. A similar risk may apply to mortgage schemes - if it is
unable to repay debts or refinance, investors' money could be at
risk.

Example 2: Undrawn credit facility

If you have a $5000 limit on your credit card and you have
bought $1000 worth of goods with it, your undrawn credit facility
is $4000.

Similarly, it's important to know the mortgage scheme's undrawn
credit facility because this may indicate that the scheme could
become more indebted in the future.

What's at stake for you?

Unless the mortgage scheme can renew or extend the due date of
its debts, the scheme might be forced to sell assets (possibly for
less than their estimated value) to repay them. The scheme might
even have to stop operating. In this case, you could lose all or
part of your capital because other creditors of the scheme will be
repaid before you.

Disclosure Principle
3: Loan portfolio and diversification

What are the details of the mortgage scheme's investment
portfolio and whatht is the scheme's policy on
diversification?

The responsible entity of the mortgage scheme should describe
the nature of the scheme's investment portfolio, including:

the loans made by the scheme (for example, the type, location,
proportion of loans in default, types of securities, future loan
commitments, maturity profiles, loan-to-valuation ratios, interest
rates and if the interest is capitalised)

what proportion of the scheme's loans has been lent to the
largest borrower and the 10 largest borrowers

the proportion of the loans that are secured by second-ranking
mortgages

if any derivatives are used

any investments by the scheme that are not loans (for example,
investments in other mortgage schemes)

how the scheme goes about lending money in general and its
policy on lending (for example, how the scheme assesses the
borrower's capacity to repay the loan and how often security
properties are revalued)

the scheme's policy on investing in other mortgage schemes and
if those schemes should meet ASIC's benchmarks and apply the
disclosure principles, and

the scheme's policy on diversification.

This disclosure principle applies only to pooled mortgage
schemes, although diversification is important for all
investments.

Disclosure Principle
4: Related party transactions

If the responsible entity enters into related party
transactions, what are the details, and risks, of these
transactions and relationships?

If the responsible entity of the mortgage scheme enters into
related party transactions, they should tell you:

the details of the loans, investments and other transactions
they have made with related parties (including the number, value
and terms of the transaction)

what relationship they have with the related party

if they need to get your approval to enter into the transaction
and, if so, when

if they do not need your approval, the reasons why

the risks of entering into the related party transaction,
and

how they assess, approve and monitor related party
transactions.

Disclosure Principle
5: Valuation policy

Where can you get a copy of the mortgage scheme's
valuation policy and how often are valuations carried
out?

The responsible entity of the mortgage scheme should tell
you:

where to get a copy of the valuation policy (for example, on
their website)

how they decided on the valuation of the security property

how often valuations are carried out, and

if there are any important differences between any current
valuation and what is disclosed in the policy.

For contributory mortgage schemes, the responsible entity only
needs to tell you about the valuations of a property securing a
loan if you are being offered an interest in that loan.

Disclosure Principle
6: Lending principles - Loan-to-valuation ratios

What are the details of the mortgage scheme's
loan-to-valuation ratios and loan-to-cost ratio (for property
development)?

The responsible entity of the mortgage scheme which lends
directly should tell you:

the maximum and 'weighted average' loan-to-valuation ratio for
the scheme

information about any loans made by the scheme that are for
property development (for example, how the funds can be drawn down,
the stage of completion and the loan-to-cost ratio), and

if a large proportion of the scheme's investments are loans for
property development (for example, more than 20%).

Disclosure Principle
7: Distribution practices

What is the source of distributions from the mortgage
scheme and when, and how often, will you be paid?

The responsible entity of the mortgage scheme should tell
you:

the source of the scheme's current and forecast
distributions

if the distributions do not come from income received, the
reason they are being paid and whether this will continue over the
next 12 months

the circumstances when a promised return might not be paid to
you, and how they will decide on a lower return

the factors that would have the most impact on the forecast
distributions, and an analysis of how changes to those factors
could affect the distributions

what the scheme will do with any excess returns, and

when distributions will be paid and how often.

Disclosure Principle
8: Withdrawal arrangements

What is the mortgage scheme's policy on allowing
withdrawals and how, and when, can you withdraw from the
scheme?

The responsible entity of the mortgage scheme should tell
you:

the scheme's policy on allowing withdrawals and whether the
responsible entity can change this policy

if you can withdraw from the scheme and how (for when the
scheme is a 'liquid scheme' or a 'non-liquid scheme')

any significant risks that could stop you getting your money
back or within the time you expected

the scheme's policy on reinvesting ('rolling over') or renewing
your money at the end of the initial period (for example, whether
this happens automatically)

if your money will be paid from a loan facility or other
external facility, the terms of the facility (for example, can the
lender at any time suspend or cancel the loan facility?)

the longest period of time you might have to wait before you
can get your money back

any rights of the responsible entity to refuse or suspend
withdrawal requests

the scheme's policy on balancing its assets against its
liabilities

if the responsible entity makes statements about your
ability
to withdraw from the scheme in the future, the reasons
that support this and any risk that you won't be able to withdraw,
and

if the scheme promotes a fixed withdrawal price (for example,
at $1 per unit), the circumstances where that price could
change.

For contributory mortgage schemes, the responsible entity only
needs to tell you this information if you can withdraw from the
scheme before your mortgage investment matures.

Think about
your own situation and needs

Does the investment meet your goals?

Whenever you invest your money, it is important to have a
financial goal in mind, and a strategy for achieving it. For
example, your goal may be a secure income for your retirement.

Think about getting professional advice from a licensed
financial adviser to help you develop a suitable investment
strategy according to the level of risk you're comfortable with.
Then measure all investments against that strategy.

Is it important to you to protect your capital?

Be careful about words like 'safe' and 'guaranteed' in
advertisements. They might imply that an investment is secure, when
in reality it is not.

Certain financial institutions like banks, building societies or
credit unions are specially regulated by the Australian Prudential
Regulation Authority (APRA) to make sure that, under all reasonable
circumstances, they can meet their financial promises to you.

This type of regulation, called 'prudential regulation',
protects you, for example, if you put your money in a term deposit
with one of these institutions.

Have you spread your investments to manage risk?

Most people have heard the saying, 'Don't put all your eggs in
one basket'. When it comes to investing your money, a good way of
managing risk is to spread your money between different investment
types, such as cash, fixed interest, property and shares. The
spread will depend on your financial goals and how much risk you're
comfortable with. These different investment types are known as
'asset classes'.

Spreading your investments to manage risk is called
'diversification'. Investing solely in unlisted mortgage schemes is
not diversification.

By spreading your money both across different asset classes and
between different investments within the same asset class, you
reduce the risk of losing everything. If you put only part of your
total funds into any one type of investment, you won't lose
everything if one investment produces poor results or fails
completely.

What returns are you being offered?

'High return means high risk' is a familiar rule of thumb.
However, as with all rules, there are exceptions to look out
for.

Some investments that appear to offer relatively modest returns
can be extremely risky. That's why it's important to think about
more than just the return when deciding whether to invest.

When comparing rates of return, make sure you compare 'apples'
with 'apples' (that is, similar investments).

Can you get your money back early?

If you plan to invest in an unlisted mortgage scheme, consider
what will happen if you need to get your money out quickly. Are
there penalties or restrictions? How long might you have to
wait?

If you need flexibility, think about investing in other
financial products that allow you to withdraw your money without
significant penalties or significant delays.

Do you know how risky the investment is?

Investing in unlisted mortgage schemes is riskier than term
deposits offered by banks, building societies and credit unions
that are prudentially regulated in Australia (see below to compare
these investments).

Ask whether the return you are being offered is high enough to
compensate you for the risks you are taking.

Can you accept the risks?

A primary risk with an unlisted mortgage scheme is that the
scheme might not generate enough cash flow to meet its costs and
debt repayments, and be unable to pay you distributions or return
your money when you ask for it.

If you don't understand these risks or you're not comfortable
taking any risks with your money, look at other financial products
instead. Get professional financial advice if you're not sure about
an investment decision.

Do you know what you're investing in?

If you're investing in an unlisted mortgage scheme, check what
the responsible entity plans to do with your money. This
information should be clearly set out in the PDS, but keep asking
questions until you really understand.

Knowing what your money will be used for and what the
responsible entity has invested in previously can help
you assess the risks and decide whether you are comfortable
with the investment.

Is the investment related to property development?

If your money will be used for property development (not
established properties), think about these extra risks:

Will the property development be completed on time and on
budget?

How is the property development valued?

How will the mortgage scheme meet its cash flow needs before
the property development is completed and sold?

The PDS should help you answer these questions.

TIP:

People like to think that investing in property is as 'safe as
houses'. In reality, it involves risk like any other investment -
the risk of losing your money.

Misleading advertising? Hard sell?

Have you come across an advertisement for a financial product
that you think is misleading?

Or have you been pressured by a sales person to make a decision
when you didn't have enough information, or weren't sure that the
product was right for you?